SECURING THE FUTURE JANUARY 6, 1997 TRANSCRIPT

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A federal advisory council formed to examine the Social Security system failed to rally around a single course of action. Instead, council members split into three groups, each backing different proposals. Privatization of at least a portion of the Social security system is part of all three plans. After a background report, Margaret Warner leads a debate with council members over the council's proposed options.

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A RealAudio version of this NewsHour segment is available. January 6, 1997 Margaret Warner provides a background report on current efforts to reform Social Security. July 16, 1996 Ross Perot describes the Social Security issue as he sees it in a NewsMaker interview.

MARGARET WARNER: Today the council issued its plan, or rather plans. Unable to reach consensus on a single set of recommendations, the panel, instead, split into three factions that offered three competing alternatives. We have three council members with us now to discuss the major issues involved. Edward Gramlich chaired the advisory council. He's an economist and dean of the School of Public Policy at the University of Michigan. Thomas Jones is president of TIAA-CREF, the nation's largest private pension fund, and Sylvester Schieber is an economist and vice president for research at Watson Wyatt Worldwide, one of the world's largest human resource consulting firms. Welcome, gentlemen.

Ned Gramlich, starting with you, before we get into the differences among you, speaking as chairman, what were the most important recommendations that a majority of commissioners did agree on?

EDWARD GRAMLICH, University of Michigan: There are several things that we did agree on. First off, this was a very diverse group. We had quite diverse opinions, and so the fact that we could agree on at least some things is a triumph of sorts. One thing we agreed on is the importance of acting now, even though, as your introduction said, the Trust Fund has another 30 years or so before it runs out of money. We all think that it is important to start making changes now before the baby boomers retire. We also agreed on some negative things. We agreed that it would be unwise to adjust for inflation apart from the BLS, that is, to make political fixes in the inflation adjustment. We agreed that--

MARGARET WARNER: By BLS, you meant the Bureau of Labor Statistics which currently oversees the Consumer Price Index. Okay. Go ahead. We have to be careful with those acronyms.

EDWARD GRAMLICH: Sorry. And the other thing we agreed on is the present means testing; that is, where you simply take away benefits from older people if they have either worked into retirement or saved a lot would be unwise. Having said that, we still have some strong disagreements. There are--we all would like to get stock market returns into Social Security but we have very different ways of doing that. And that's what you're going to hear about tonight. And these--these different approaches range from what Tom Jones is going to talk about as having the central OASDI, Old Age Survivors Disability Insurance Trust Fund hold equities, and the other two of us are going to talk about a new approach called Individual Accounts, where people have their own individual accounts. These are done alongside Social Security, and people have what I'll call investment choices. They can hold portfolios of bonds and stocks and choose whether to hold bonds or stocks alongside Social Security.

MARGARET WARNER: All right. Let's let look at some of these major differences, and start with the question of investing in the stock market.

And Tom Jones, starting with you, you all, as Mr. Gramlich just said, agreed that the time has come to do some kind of moving, diversifying the investments out of strictly government bonds into the market. But why do you think that's a good idea, and how would you structure it?

THOMAS JONES, TIAA-CREF: Well, Margaret, the first point that I would emphasize is that even though the Trust Fund would be exhausted in the year 2030, the ongoing tax revenue stream to Social Security would maintain current law benefits for an additional 45 or 50 years beyond the year 2030.

So there's no real issue of short-term insolvency within Social Security. Because 75 percent of current law benefits can be paid even after the year 2030, there's a relatively modest package of adjustments, such as bringing all state and local government workers under Social Security modest adjustments which are well within our historical tradition of adjusting Social Security, which could solve most of the remaining deficit. Exactly 2/3 of the remaining deficit could be resolved by very modest, gradual adjustments. For the remaining 1/3 of the deficit there are alternative ways of doing it.

One of the preferable ways is to increase the investment rate of return to Social Security. You can do that by investing as a defined benefit plan under a central organization, or you can do it through individual accounts. The reason that I favor doing it through a central investment program is because the primary goal of Social Security is to provide retirement income adequacy to the 50 percent of U.S. workers who have no other pension coverage. For them, retirement income adequacy is an absolute must through Social Security. Therefore, to put them at risk by giving 30 or 40 percent benefit reductions in Social Security and hoping that these individuals can make it up in their individual accounts through their investment acumen I think is not wise, and it's not fair to those low and moderate income workers.

MARGARET WARNER: So to--let me just clarify for our viewers, your proposal would be that the government continue to run the whole Social Security Trust Fund but just diversify its own portfolio and start putting some of the money in stocks, but that people will continue to get a guaranteed benefit, as they do now, wouldn't have to depend on their own investment, as you said, acumen, is that--

THOMAS JONES: That's exactly right, though the government would not be doing the investing. The government would hire professional private sector investment managers. The government would have an investment policy board which would define what the appropriate investment policies would be, but then the actual investment decisions would be hired out to the private sector.

MARGARET WARNER: Okay. Now, Syl Schieber, you have a very different view of how this should work. Explain that.

SYLVESTER SCHIEBER, Watson Wyatt Worldwide: Margaret, a number of us on the council are very concerned about the federal government becoming the largest single investor in our private equity markets. We think it's contrary to historical approaches to government in the private sector. We believe there should be some real savings, some accumulation of wealth that can be invested. We think that the only practical way that that can be accomplished is through individuals directing savings in their own retirement accounts. And we have developed a proposal that would allow individuals to keep 5 percent of covered payroll, about half of the payroll tax that finances retirement benefits today, that would be directed into individual accounts, where they would actually be able to move money around throughout their working career. They would not be able to tap it until they were eligible for retirement. But at retirement, that would become a very substantial portion of their total retirement security benefit.

MARGARET WARNER: Okay. And Ned Gramlich, your--you and your group tried to steer a middle ground here. Why? Why didn't you like either of these plans, and how would you do it?

EDWARD GRAMLICH: Well, in a way, I agree with both of my friends in the council. I would agree with Tom Jones, that it's important to preserve the essence or the important social protections of Social Security. And I've developed a plan that I believe does that. And I would agree with Syl, that it's important to raise overall saving for retirement and give people some stake in that by their own individual accounts. And so I actually have a plan that is a little bit of a hybrid between the others, where I preserve the importance of social protections of Social Security, but I still raise national saving. And the problem that Tom did not mention with his plan is that there is no saving increase in that, and the--we don't think that's a particularly good idea. We think that this is an important opportunity for reform. And there should be new saving in for retirement systems.

MARGARET WARNER: And how would yours deal--how would yours deal differently with then Syl Schieber's approach, which is to give individuals control over their IRA's essentially?

EDWARD GRAMLICH: My approach is, in general, more regulated. Rather than just having people getting their own IRA type account, I would have the government hold these, the government choose broad mutual funds, the government give people five to ten investment choices, and so you would cut down the risk a lot in that way. And also, I would have a more developed Social Security system under--under these individual accounts, so that if investments didn't turn out well, you wouldn't lose all your benefits. You might lose some of them. So it's really in many ways kind of a middle-of-the-road approach between the two that you've heard about and I guess I'm hoping that as we hit the broader political world that there is some kind of a compromise around an approach such as mine.

MARGARET WARNER: All right. Let's look at another issue that is usually raised when talking about how to improve or save Social Security. And that has to do with benefits. Do you advocate, Mr. Schieber, reducing the rate, reducing the amount of guaranteed benefits?

SYLVESTER SCHIEBER: Yes, we do. The current payroll that supports retirement benefits is around 10 percent of payroll. The employer pays half. The employee pays half. If we're going to allow the individual--the individual worker--to keep half of that money in an account to provide for their own benefit protection, then it seems to make sense that since you're going to have less financing going into the central system that you would reduce benefits that are provided through the central system. We would reduce the benefits in the central system to a flat benefit. Everyone who works a relatively full career would get the same benefit. That benefit would be around $410 a month in current day dollars.

MARGARET WARNER: As opposed to the current average is about $700.

SYLVESTER SCHIEBER: That is correct. Now over time that benefit will grow as wages grow. By the time the system would be fully phased in, that benefit would be roughly equivalent to poverty, the poverty line in the United States. In addition to that guaranteed benefit, that floor of protection that everyone would receive, they would get the benefits from their individual account. In the aggregate, the estimates suggest that our benefits would be larger than current law benefits would be or the benefits in either of the other proposals.

MARGARET WARNER: All right. Tom Jones, your group wants to maintain benefits entirely at a guaranteed level?

THOMAS JONES: Essentially. We're in favor of a very modest benefit reduction. On average, we think just a 3 percent benefit reduction is required in order to stabilize the program. The magnitude of benefit reductions under Prof. Gramlich's plan I think is an average of 30 percent across the board. And I believe it's a much higher percentage average benefit reduction under Mr. Schieber's plan. We don't think it's appropriate to so reduce the guaranteed level of benefits that as Mr. Schieber described his flat benefit is significantly below the poverty level. We just don't think that it's likely that those workers who most need Social Security--remember, it's the half of U.S. workers who have no other pension plan coverage--and for the most part, it's the bottom half of the income distribution--we do not think it's fair to these people to take away the guaranteed benefit and leave them to their own devices to hope that they will be successful in the investment market. We don't think that that's very likely to happen.

MARGARET WARNER: Ned Gramlich, is it true--it is true, isn't it, that your plan also would reduce the guaranteed benefit, and why is that necessary?

EDWARD GRAMLICH: It's necessary because the system's out of balance, and you could either raise taxes or cut benefits. That's about it. And so I have tried to, if you will, fit the benefit schedule under the present tax rate, 12.4 percent tax rate, for retirement purposes, and 30 percent is the absolute minimum necessary to make the--to bring the system in balance, and so that's why that's the cut. Now, it is--the cut is much heavier for the top. I have actually changed the benefit schedule so there is a big increase in protection from the central system for low wage workers, but those benefit cuts of those orders of magnitude are necessary to bring the system into balance. And that is something that the whole council has agreed to.

MARGARET WARNER: All right. And briefly before we go, I want to ask you each about taxes, the other thing that's on the minds of I'm sure many of our viewers. Will payroll taxes, or taxes on benefits have to go up? Mr. Gramlich, go ahead.

EDWARD GRAMLICH: There are two aspects of this. For those benefits paid out of the central system all of us agree that there ought to be some adjustments in the way that the income tax, the federal income tax is imposed on benefits, and here I'm more in agreement with Tom, that the change ought to be in the direction of making, in effect, workers pay benefits--I mean, pay income taxes on all benefits that they have not previously been taxed on. On the individual accounts that are part of the plan that I have and also that Syl has, we all would agree that they ought to be taxed in the way that 401(K)s or IRA's are now taxed in the tax system. So the idea here is to make the taxes, whether income-based or on the defined contribution accounts, consistent with the rest of the income tax code.

MARGARET WARNER: Would payroll taxes--excuse me, wouldn't payroll taxes also go up under your plan?

EDWARD GRAMLICH: That's a semantic issue. I would say that the present 12.4 percent OASDI tax rate would stay the same. There would be a mandatory contribution of 1.6 percent that would go under your individual account. I wouldn't call that a tax, however, because, No. 1, it wouldn't be in the budget, and No. 2, it would be your money.

MARGARET WARNER: Okay.

EDWARD GRAMLICH: And so it's deferred saving.

MARGARET WARNER: Quickly, Mr. Schieber, do you think taxes are going to have to go up?

SYLVESTER SCHIEBER: In our proposal workers would have to contribute an additional one and half percent during a transition period as we move from an unfunded system to a funded system. We could use Ned's approach. We could say this is a one and a half percent voluntary or mandatory contribution into a savings account that the government would match with a 3 and a half percent contribution. Most people would take such a match. If you want to not call that a tax and call it a matching program, instead, we would be happy to do that. We have acknowledged that it would be a tax because it would be a mandatory additional contribution.

MARGARET WARNER: All right, gentlemen. We have to leave it there. Mr. Jones, sorry not to get to you on the tax issue, but I know we'll be returning to this often. Thanks.

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